TMI Blog2003 (4) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... sake of brevity as "PAL") was engaged in the manufacture of two cars, viz., Padmini and Premier 118 NE, at Kurla and Kalyan, respectively. PAL had plant and machinery for 118 NE at Kalyan, Kurla (gear box) and rune (machining) (hereinafter referred to as the "Kalyan undertaking"). PAL had manufacturing facility for Padmini at Kurla. PAL entered into a MOU on March 11, 1993, with Automobile Peugeot (AP) to establish a joint venture company known as Kalyan Motors Co. Ltd. (KMCL) for manufacture and distribution of 60,000 Peugeot cars throughout India. Under the MOU, it was agreed that PAL will contribute to the equity of the joint venture company KMCL to the extent. it was engaged in the manufacture and sale of 118 NE cars. PAL also entered into a supplemental MOU with AP on May 17, 1994. PAL also executed a deed of declaration of trusteeship on September 29, 1994, whereby PAL agreed to sell, assign and transfer to Kalyan Motor Company Ltd., its Kalyan undertaking as a going concern on an "as is where is" basis. On October 19, 1994, PAL entered into a joint venture agreement with AP. On January 6, 1995, PAL executed a slump sale agreement whereby PAL transferred and sold to Kalyan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances of the case, the Tribunal was justified in holding that the transaction of sale of Kalyan business was not a slump sale 7 (c) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the lump sum consideration of Rs. 210 crores is apportionable to different assets and that the value of individual assets is ascertainable? (o) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the apportionment of Rs. 210 crores done by the transferee-company for its accounting purposes should be taken by the Assessing Officer for working out the depreciation allowable to the assessee-company?" Arguments: (A) Challenge to the impugned assessment order Mr. S.E. Dastur, learned senior counsel appearing on behalf of the assessee-PAL, invited our attention to the MOU dated March 11, 1993, between PAL on the one hand and AP on the other hand. He submitted that the object of the MOU was to create a joint venture manufacture of 60,000 vehicles for which AP offered to contribute Rs. 350 crores and PAL agreed to contribute Rs. 210 crores in the joint venture. He submitted that AP offered a good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o check the capacity of the Kalyan undertaking to manufacture 60,000 Peugeot cars. That, under clause 2 of the supplemental MOU, the only exercise which was required to be undertaken was, whether there existed the principal assets in the Kalyan undertaking for which the estimated cost was fixed at Rs. 210 crores. That clause 2 did not deal with valuation. That, under clause 3(b)(II), AP was to conduct due diligence exercise. That, under the supplemental MOU, it was, inter alia, provided that the parties shall execute slump sale agreement by September 30, 1994, failing which the MOU and the supplemental MOU would stand terminated. That, the MOU and the supplemental MOU were subject to approval by the Government authorities. Mr. Dastur further pointed out that on September 29, 1994, PAL declared that the Kalyan undertaking will be held in trust and to the account of the new JVC to be called Kalyan Motor Company Ltd. and from that date the Kalyan undertaking will not be held on account of PAL. Mr. Dastur further invited our attention to the joint venture agreement between PAL and AP dated October 19, 1994, which refers to incorporation of a new JVC called as Kalyan Motor Company L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to PAL a sum of Rs. 113 crores. (iii) The balance amount of Rs. 13 crores was payable to PAL on completion of the paint shop by PAL. Mr. Dastur further pointed out that under clause 2.B.3, the price of acquired current assets and acquired current liabilities was to be paid subject to Rs. 5 crores being retained by KMCL as guarantee against payment related to deposits obtained by PAL from its suppliers. That, under clause 2.C, all costs for dismantling and transportation of acquired net assets up to the site at Kalyan was to be borne by PAL and all costs relating to installation of acquired net assets was to be borne by KMCL. Mr. Dastur next invited our attention to clause 3.6 under which PAL represented to KMCL that the net assets transferred to KMCL had a production capacity of 30,000 vehicles per annum. That, under clause 3.7.1 PAL agreed to transfer its employees of the Kalyan undertaking. Under clause 3.7.2, KMCL agreed to take over such employees with continuity. That, the initial total payroll cost attributable to such employees was not to exceed Rs. 24 crores. Under clause 3.8 of the agreement, PAL was entitled to carry on its residual business of manufacture of Padmini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther points out that, similarly, the Assessing Officer fixes the sale price of the paint shop at Rs. 68,00,03,809 and deducts therefrom the cost price of Rs. 60,42,69,150 in order to arrive at the short-term capital gain of Rs. 7,57,34,659 which is added to the total income of PAL. Mr. Dastur submits that the sale price adopted by the Assessing Officer was based on the report of the valuer of September, 1996. He contended that the MOU was entered into on March 11, 1993, under which the entire Kalyan undertaking was transferred for Rs. 210 crores. That, on March 11, 1993 the report of September, 1996, did not exist. That, therefore, the Assessing Officer was wrong in coming to the conclusion that there was a sale of itemized assets. He contended that this finding of the Assessing Officer was perverse. He contended that if the argument of the Assessing Officer was to be accepted, namely, that because of the conveyance of land and building there was no slump sale then such an argument would lead to an absurd conclusion because in every slump sale there has to be a conveyance. Mr. Dastur further pointed out the perversity of the order passed by the Assessing Officer. As per the repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntended that every buyer values the assets which he buys at a higher rate so that he could claim higher depreciation and, therefore, apportionment of price by PPL cannot be the yardstick for coming to the conclusion that there was a sale of itemized assets. Mr. Dastur pointed out that even according to the accounting standards laid down by the Institute of Chartered Accountants, a buyer who purchases the undertaking at a lump sum price is required to apportion the price item-wise. Mr. Dastur next contended that there is a difference between values assigned to the land as the assessee-PAL while applying for certificate under section 230A, has relied upon the valuation of November, 1995, whereas the Assessing Officer relies upon the valuation of September, 1996. Therefore, it was argued that the order of the Assessing Officer was full of contradictions. Mr. Dastur next invited our attention to the audit report of the PPL for year ending March 31, 1995. He pointed out that in this report, there is no sale value of plant and machinery. He contended that the value was not there because the entire Kalyan undertaking was sold for a lump sum price of Rs. 210 crores as indicated by MOU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 ITR 461 (Ker); Killick Nixon and Co. v. CIT [1963] 49 ITR 244 (Bom). Mr. Dastur also relied upon various authorities in support of his contention that, in this case, the entire Kalyan undertaking constituted an undertaking and that there was a transfer of the Kalyan undertaking as a capital asset. In this connection, he placed reliance on the judgment of the Kerala High Court in the case of Karvalves Ltd. v. CIT [1992] 197 ITR 95, 103. Mr. Dastur has placed reliance on two judgments of the Supreme Court in the case of CIT v. Artex Manufacturing Co. [1997] 227 ITR 260, 276, as also in the case of CIT v. Electric Control Gear Manufacturing Co. [1997] 227 ITR 278, 281 (SC), which will be dealt with at the proper place hereinafter. (B) Challenge to the findings of Third Member of the ITAT For the sake of convenience, the impugned order is of the Third Member of the Tribunal which is basically under challenge. Mr. Dastur, thereafter, challenged the findings of the Third Member of the Tribunal. In para. 31, the Third Member of the Tribunal has held that the entire land of the Kalyan undertaking was not sold. That, only a portion of the land was sold and, therefore, there was no s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mp sale, there should be, in every matter, transfer of the entire business. In this connection, our attention is invited to the judgment of the Bombay High Court in the case of CIT v. Narkeshari Prakashan Ltd. [1992] 196 ITR 438 in which the assessee, a publishing house, having branches at two places, had sold the said two branches to two different co-operative societies and yet, it was held by the Bombay High Court that since the entire branch business as a whole was transferred, it constituted a slump sale. It was argued on behalf of the assessee that it is not necessary that the entire business should be transferred. That, in the case of Narkeshari Prakashan Ltd. [1992] 196 ITR 438 (Bom), the entire business was not transferred. That, only two branches were transferred. That, in this case, the entire business of PAL has not been transferred. That, only the Kalyan undertaking pertaining to manufacture of 118 NE cars has been transferred. It was, therefore, submitted that the basic test in order to be a slump sale was that there should be a transfer of a business and not all the businesses of the assessee. It was argued that PAL maintained separate books for Kurla, rune and Kalyan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in coming to the conclusion that there was apportionment of price item-wise in view of the certificate obtained by PAL under section 230A of the Income-tax Act. Mr. Dastur invited our attention to the finding of the Tribunal in which it is held that PAL was aware of the value of the land, building and plant and machinery as indicated in its application for obtaining certificate under section 230A but PAL deliberately suppressed the valuation in its MOU dated March 11, 1993, and, therefore, it was not a slump sale. The assessee has challenged this finding as perverse. According to the assessee, PAL had applied for the said certificate under section 230A on the basis of the valuation report dated November, 1995 but the Tribunal proceeds to give a value to the land and building as per the report of the valuer of September, 1996. In the circumstances, it was argued that the finding of the Tribunal needs to be set aside. That, the basic issue was whether, in this case, there is any evidence to show that PAL was aware of the value of the land and building on March 11, 1993. It was argued that the Tribunal erred in coming to the conclusion that PAL was aware of such value by placing r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he higher side. That, the consideration in this case for the entire Kalyan undertaking being transferred was Rs. 247 crores. That, in this case, we are only concerned with the issue as to whether the transaction was a slump sale. That, no separate consideration has been received by PAL for quota, licences, transfer of employees and intellectual property rights, etc. In the alternative, Mr. Dastur contended that even if the transaction is treated as a sale of itemized assets still the matter will have to be remanded to the Assessing Officer because the Assessing Officer has not assigned any value in his order to assets such as quota, licences, DGTD registration, etc. That, in this case, the Assessing Officer has only valued the land, building, plant and machinery and the paint shop. That, the overall total price of the slump sale was Rs. 210 crores plus the realized value of net current assets. However, the Assessing Officer has not given any sale value to the above intangible assets. Mr. Dastur pointed out that the Assessing Officer erred in valuing building, plant and machinery and paint shop as depreciable assets and consequently he has erroneously made the assessee liable for sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding is erroneous. Mr. Dastur points out that under clause 2(a)(ii) of the supplemental MOU, verification of the principal items of assets is contemplated as a part of the due diligence exercise under which PPL was required to verify existence and location of assets worth Rs. 210 crores and to gage whether those assets had the potentiality to manufacture 60,000 Peugeot cars. For that purpose, all other items in the proforma have been particularised. He contended that the pro forma had several columns. He contended that due diligence exercise is undertaken for several reasons. That, in this case, it was undertaken to verify existence of assets. In the circumstances, valuation was not on the agenda and, therefore, the column is left blank. He contended that the Assessing Officer erred in drawing an adverse inference against PAL. He contended that the Tribunal erred in holding that PAL had deliberately kept such column blank. Mr. Dastur therefore submits that the above finding of the Tribunal is erroneous. Mr. Dastur next points out that, in this case, if the court holds that there was a slump sale of the entire Kalyan undertaking even then the matter will have to be remanded back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous because in the assessment order, the Assessing Officer has specifically discussed the items appearing in the property register maintained by PAL which register was a fixed asset register. Mr. Dastur invited our attention to another finding of the Third Member of the Tribunal at page 537 which states that there was no slump sale as PAL has not transferred deposits of its customers. Mr. Dastur submits that this finding is also erroneous. He pointed out that these deposits have been received by PAL for advance booking of cars. That, the parties to the contract found that it would be difficult to assign the deposits to PPL because there were large number of depositors and it would be very difficult to obtain their consent and, therefore, a different method of transfer has been evolved under the slump sale agreement under which PAL was to retain such deposits and under which PAL was responsible for implementing such booking contracts up to completion. That, in the event of the booking contract not being performed, PAL had to pay back such deposit with interest to the depositors. Mr. Dastur therefore contended that clause 4.6.1 of the slump sale agreement cannot be relied upon to h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e liability to the tune of Rs. 13 crores to PPL. Mr. Dastur invited our attention to the finding of the Third Member of the Tribunal at page 538 in which it has been held that PAL did not transfer the depreciation fund to PPL. Mr. Dastur submits that this finding is perverse. He points out that, in this case, there was no such fund in existence. That, in this case, there was merely a depreciation account in the books of PAL. He submitted that depreciation was only a notional reduction in the value of assets and when PAL transferred the Kalyan undertaking as a capital asset to PPL, there was no transfer of depreciation as an item of transfer. He contended that depreciation was similar to salary which is a charge on the profit and loss account of the assessee. That, such a charge exists only in the books of account of PAL. That, when PAL transferred its work-force to PPL, it cannot be asked as to why salary was not transferred. He contended that salary and depreciation represented charges on the profit and loss account of PAL. In the circumstances, he submitted that this finding of the Tribunal is perverse. Mr. Dastur invited our attention to the finding of the Third Member of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... geot cars during the accounting year April 1, 1994, to March 31, 1995, and that they had sold these cars for which the turnover was Rs. 177.26 crores. That, this turnover is reflected in the order of assessment passed in the case of PPL for the said accounting year ending March 31, 1995. Therefore, without transfer, PPL could not have manufactured the cars worth Rs. 177.26 crores. He therefore submitted that the finding of the Tribunal that there was no transfer of assets was totally perverse. Mr. Dastur invited our attention to the finding of the Third Member of the Tribunal at page 538 which states that PAL did not transfer its wage liability to PPL and, therefore, there was no slump sale because the entire Kalyan undertaking was not sold lock, stock and barrel. Mr. Dastur contended that this finding was erroneous. He submitted that there were wage settlements under the Industrial Disputes Act between PAL and its employees. That, the work-force of PAL vis-a-vis the Kalyan undertaking was transferred to PPL. That, settlements under the Industrial Disputes Act had to be implemented by PAL. Therefore, it cannot be contended that there was no slump sale. That, one has to take a b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onveyance PAL had to obtain a certificate under section 230A and, for that purpose, the immovable property had to be valued. Therefore, the report of Dalvi and Associates dated November 15, 1995, had to be obtained for land and building. That, when the assessee applied for a certificate under section 230A of the Income-tax Act, they had to get the land and building valued. Accordingly, Dalvi and Associates valued the property at Rs. 43,44,59,477.50 vide report dated November 15, 1995. That, this was the value of the land and building as on September 29, 1994, which was the sale date under the slump sale agreement dated January 6, 1995. Therefore, the Tribunal erred in holding that since there was a conveyance and certificate under section 230A, the assessee was aware of the price of the land and building on March 11, 1993. He contended that in the entire MOU, there is no sale value assigned to the land and building. That, Rs. 210 crores is the sale value for the entire Kalyan undertaking. That, even PPL assigned the value of land and building in its books only after the report dated November 15, 1995, and after the report of Nagarseth dated September, 1996. That, this value has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e exercise was undertaken to verify the existence of and to judge the capacity of assets to be used for manufacture of cars. That, there were hundreds of assets which were required to be identified and located. That, it was impossible to value hundreds of assets on March 11, 1993, and, therefore, when the MOU was signed on November 11, 1993, there was no verification of each and every item of asset. He pointed out that if the parties had undertaken this exercise then it was impossible to sign the MOU because it would have taken three to five years to verify each and every item. In the alternative, he contended that, even if on March 11, 1993, the assets would have been valued at Rs. 500 crores (by way of an illustration), it would not have made any difference because, under the MOU, the contractual price for Kalyan undertaking was fixed at Rs. 210 crores and, therefore, there was no charm in valuing each and every item of assets. That, the purpose of the due diligence exercise was only to find out the existence and the condition in which the assets stood and whether those assets were capable of producing 60,000 Peugeot cars. That, due diligence exercise was undertaken during the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ombay High Court the sale of the Kalyan undertaking by PAL was also lock, stock and barrel and, therefore, it was a slump sale. Mr. Dastur contended that the Tribunal erred in not applying the judgment of the Bombay High Court on the ground that it did not relate to capital gains tax but it related to profits arising on sale of a branch of the assessee under section 41(2) of the Income-tax Act as it stood at the relevant time. Mr. Dastur argued that the judgment of the Tribunal was wrong because the principle applicable for working out the balancing charge under section 41(2) of the Act and the principle applicable for working out the capital gains under section 50 was the same. That, in both the cases the assessee was required to work out the sale price of individual assets. He, therefore, contended that the Tribunal had erred in not applying the judgment of the Bombay High Court in the case of CIT v. Narkeshari Prakashan Ltd. [1992] 196 ITR 438. Mr. Dastur contended that, similarly, the Tribunal erred in applying the judgment of the Supreme Court in the case of CIT v. B.M. Kharwar [1969] 72 ITR 603. He contended that in the case of B.M. Kharwar [1969] 72 ITR 603 (SC), it was a ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pread over land, building, plant and machinery, licences, quotas DGTD registration, work-force, intellectual property rights, right to use the name of Premier, etc. That, in such an event, the Assessing Officer will also have to decide whether each of the above assets are held for long-term or short-term periods and accordingly the Assessing Officer will have to decide the cost of each item. That if any item is found to be a long-term capital asset then further the Assessing Officer will have to consider indexation of the cost of acquisition and the cost of improvement. In short, it was submitted that the Assessing Officer will have to apportion Rs. 210 crores over not only depreciable assets like building, plant and machinery but the Assessing Officer will also have to apportion the said amount of Rs. 210 crores over all other assets described above. He further contended that the Assessing Officer will also have to decide the quantum of depreciation which the assessee would be entitled to, depending on the question. whether there was a sale of the Kalyan undertaking or whether there was a sale of itemized assets. Mr. Dastur contended that the judgment of the Accountant Member at p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this case, the test laid down by the Bombay High Court in the case of CIT v. Narkeshari Prakashan Ltd. [1992] 196 ITR 438 was applicable. He contended that, in this case, there was no transfer of the Kalyan undertaking, lock, stock and barrel. That, in this case, there was no transfer of assets and liabilities of the Kalyan undertaking. That, in this case, the entire Kalyan undertaking was not transferred and, therefore, unless all the assets and liabilities were sold it cannot constitute a slump sale. It was contended that in order to constitute a slump sale, there must be a transfer of the entire business on an "as is where is" basis. It was further argued that, in this case, PAL has sold machines which stood in the Kurla unit and the rune unit and, therefore, there was no slump sale. That, PAL was not entitled to sell assets of other business situate at Kurla and rune which they have done in this case. He further contended that, in this case, the total area of the Kalyan unit was 18,000 sq. meters (approximately) whereas under the arrangement only 7,000 sq. meters have been transferred by PAL to PPL and, therefore, all the assets of the Kalyan undertaking have not been transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ump sale. He contended that the assessee was not entitled to rely upon the definition of the word "undertaking" in the Income-tax Act as defined under section 2(19AA) read with Explanation 1 thereto as the amendment was not there during the assessment year in question. He further contended that, in this case, the assessee was not entitled to rely upon the definition of the word "slump sale" under section 2(42C) as the said section did not exist during the assessment year in question. He contended that we have to go by the test laid down by the Bombay High Court in case of CIT v. Narkeshari Prakashan Ltd. [1992] 196 ITR 438, viz., that in order to constitute a slump sale, there must be a transfer of a going concern. Mr. Desai next pointed out that, in this case, all the liabilities of PAL have not been transferred. In this connection, he placed reliance on clause 4.6 of the slump sale agreement to show that deposits received from the customers who had booked cars for purchase have not been transferred by PAL to PPL. That, these deposits have been retained by PAL. That, under clause 4.6 of the slump sale agreement, it is clearly stipulated that such deposits will not form part of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.B.1, the price of the Kalyan undertaking was fixed at Rs. 247 crores and not Rs. 210 crores. He contended that after entering into the slump sale agreement, the value assigned by the parties to the current assets as on September 29, 1994, was Rs. 37.84 crores and odd and, therefore, the total consideration for transfer was Rs. 247 crores divided into two parts of Rs. 210 crores plus Rs. 37.84 crores. Mr. Desai contended that it is well settled principle of law that if even one of the two items has a value which was ascertainable then the transaction would cease to be a slump sale. He contended that, in this case, value has been assigned to net current assets acquired by PPL of Rs. 37.84 crores and, therefore, the Department was right in coming to the conclusion that there was no slump sale. Mr. Desai contended next that, in this case, PAL did not supply the values to Assessing Officer. That, the values were known to parties when they entered into the MOU on March 11, 1993. That, since PAL did not supply those values, the Assessing Officer has relied on the balance-sheet submitted by PPL in order to arrive at an approximate value in order to compute the liability of PAL. In this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, due diligence exercise was undertaken by PPL. That, for that exercise a pro forma was prepared in which there is a column representing value of each asset. He contended that the Assessing Officer has correctly found that this column relating to value has been deliberately kept blank in order to prevent the Department from computing the correct liability of PAL to pay capital gains tax and, for that purpose, the column has been kept blank although all other columns have been filled in. Mr. Desai contended that, in this case, the basic issue is whether the transaction in question was a slump sale or an itemized sale. That this point was required to be decided by the Assessing Officer by examining the terms and conditions mentioned in the MOU, the supplemental MOU, the joint venture agreement, the slump sale agreement, etc. He contended that all the authorities below have examined the terms and conditions mentioned in the above documents and they have given concurrent findings to the effect that the transaction in question was an itemized sale and not a slump sale. In the circumstances, it was submitted that this court should not interfere with the concurrent findings of fact. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a sale of itemized assets. Mr. Dastur submitted that there are three broad tests to be applied to decide the basic question involved in this appeal, viz., whether the subject transaction is a slump sale? Firstly, do the assets constitute a running business? If assets, which are transferred, constitute running business then the transaction is a slump sale. However, if, in a given case, an assessee has assigned sale values to the itemized assets then the question may arise whether the transaction was a slump sale? He contended that, in this case, on and after September 29, 1994, manufacture of 118 NE cars was transferred to PPL. That, for the relevant accounting period ending March 31, 1995, the turnover in the books of PPL was Rs. 177,26,81,546. That, prior to September 29, 1994, these cars were manufactured by PAL. Therefore, the entire running business of manufacture of 118 NE cars stood transferred to PPL on September 29, 1994, and, therefore, the subject transaction constituted the slump sale. In this connection, reliance was also placed on the judgment of the Bombay High Court in the case of CIT v. Narkeshari Prakashan Ltd. [1992] 196 ITR 438. It was submitted that in the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,546 for the year ending March 31, 1995, and, therefore, this basic test propounded above stood satisfied. He submitted that, in this case, the Assessing Officer was required to step into the shoes of two contracting business parties and find out whether they agreed upon sale of individual assets or whether they contemplated sale of the entire running business. He submitted that, in this case, there is no evidence to show that on March 11, 1993, PAL was aware of the value of each individual asset. That, there is no evidence to show that on September 29, 1994, the parties had evaluated sale of itemized assets. That there is no evidence to show that on March 11, 1993, separate amounts were fixed for plant and machinery, land, building and other assets. He, therefore, submitted that in this case the sale was of the entire business and, therefore, it was a slump sale. Mr. Dastur next contended that on March 11, 1993, the current assets could not be valued and, therefore, in the MOU it has been so stated that the sale value to the current assets would be assigned on the date of sale. He contended that on March 11, 1993, the parties were not even aware as to the date on which the sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business"). In the circumstances, Auto Peugeot, a French company, was interested in investing Rs. 350 crores in India. to set up a joint venture company (hereinafter referred to as "PPL") to manufacture 60,000 cars per annum. This French company was interested in making this huge investment as it found that the Indian company, PAL, had a ready infrastructure worth Rs. 210 crores plus the value of net current assets. This preface is important because in order to judge the nature of the impugned transaction, one must take into account the terms and conditions of the slump sale agreement as also the relevant surrounding circumstances as prevalent on March 11, 1993. (B) Analysis of MOU, supplemental MOU, joint venture agreement and slump sale agreement Before analyzing the aforestated agreements, it may be noted that, in this case, we are concerned with the assessment year 1995-96. During that year, the definition of the "slump sale" under section 2(42C) was not there as that definition came on the statute book only under the Finance Act, 1999, with effect from April 1, 2000. The concept of slump sale initially was evolved under judge-made law which has been subsequently recog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he gear box shop at Kurla in all priced at Rs. 210 crores as on March 11, 1993. Hence, under the MOU a lump sum price was fixed for the entire Kalyan business to be transferred to the JVC. (ii) Analysis of supplemental MOU dated May 17, 1994 On May 17, 1994, a supplemental MOU was executed between AP and PAL. One of the objects of the supplemental MOU was to take steps to complete the process of signing joint venture documents by July 31,1994, and to undertake verification of principal assets to be transferred by PAL to its subsidiary viz., Kalyan Motor Company Limited (hereinafter referred to as "KMCL"), which was later called PPL. The verification process covered plant and machinery at Kalyan and also facilities at rune and Kurla. Under the supplemental MOU, PAL undertook to promote a new company in the name of Kalyan Motor Company Limited. The verification process contemplated by the supplemental MOU referred to identification of principal assets to be transferred by PAL to KMCL. In this case, it has been held that the verification process also covered valuation. That, the due diligence report of the transferee showed that there was a separate column titled "value" in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stly, one has to construe the entire arrangement in order to ascertain the true intention of the parties and merely because there is a schedule of assets on record, it cannot be said that there is a sale of itemized assets. It is also important to note that even the Foreign Investment Promotion Board of Government of India has granted its approval on the footing that there is a slump sale for Rs. 210 crores (see letter dated July 6, 1993, addressed by Ministry of Industry, Government of India to PAL granting permission to set up a joint venture for manufacture of 60,000 motor cars per annum with AP of France). Moreover, before the foreign party could enter into the slump sale agreement, it was entitled to know whether the assembly line was capable of manufacturing 60,000 cars per annum. Therefore, clause 2 of the supplemental MOU contemplated verification process. AP could not have made the investment of Rs. 350 crores without checking the status of the principal assets and their capacity to manufacture 60,000 cars per annum. Under clause 3(b)(II) of the supplemental MOU, it has been provided that AP will conduct due diligence exercise of the Kalyan assets and only if AP was satisf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mp sale agreement, KMCL shall issue and allot equity shares to PAL and shall pay balance amount to PAL on terms and conditions mentioned in the slump sale agreement. These are the various recitals which have not been read. As stated above, we have to read the entire joint venture agreement in order to ascertain the intention of the contracting parties. Under article II of the joint venture agreement, it has been provided that the sale of Kalyan business by PAL to KMCL shall be made pursuant to and in accordance with the slump sale agreement. That PAL and KMCL shall initiate filing of applications, obtaining of approvals, etc. in relation to sale of Kalyan business to KMCL. Under article V, after satisfactory completion of the above, KMCL was to change its name to PPL (PAL Peugeot Limited). In the entire joint venture agreement, therefore, there is no evidence of sale of itemized assets. The joint venture agreement is dated October 19, 1994, and the price of Rs. 210 crores fixed under the MOU dated March 11, 1993 has remained constant. There is no clause for valuation of assets in the entire joint venture agreement dated October 19, 1994. That, the joint venture agreement refers t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e MOU was executed on March 11, 1993, it was not possible for the parties to know the value of net current assets on September 29, 1994. Thirdly, the price of Rs. 210 crores fixed under the MOU was not only for fixed assets but it also took into account business advantages like licences, quotas, etc. That, merely because the slump sale agreement refers to a sale of the net current asset for Rs. 37.84 crores (approx.) cannot lead one to the conclusion that there was a sale of itemized assets. Further, the value of the net current assets has no profit element. Lastly, Rs. 210 crores plus the value of the net current assets like stock, raw material, etc., as on September. 29, 1994, represented total consideration payable by KMCL to PAL as a lump sum amount. At this stage, it may be mentioned that under the slump sale agreement a sum of Rs. 13 crores was kept in abeyance by KMCL as there was a paint shop under construction on the date of the slump sale agreement which was to be completed by PAL. However, as per the findings, there was no slump sale as PAL had not transferred the paint shop to KMCL under the slump sale agreement. This finding is erroneous. The Assessing Officer has co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer was required to allocate Rs. 210 crores not only to land, building, plant and machinery but he was also required to spread over Rs. 210 crores to all the assets in which event the liability of PAL would stand reduced. This aspect has not at all been considered. There is one more aspect which needs to be mentioned. In this case, there is a transfer of work-force. Such assets do not carry value. In the circumstances, we are of the view that reading the agreement dated January 6, 1995, as a whole, it is a slump sale and not a sale of itemized assets. Now, in the present case, under the slump sale agreement, the stamp duty is required to be paid by the transferee on the conveyance of land and building. According to the impugned findings, in this case, there is a sale of itemized assets because a conveyance of land and building was executed on May 27, 1996. This finding is erroneous. As stated above, we are required to examine the entire arrangement consisting of the MOU, the supplemental MOU, the joint venture agreement and the slump sale agreement. On reading the said arrangement, one finds transfer of land, building, plant and machinery as a part of the entire Kalyan busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mers and it would be very difficult to assign deposits to the transferee without the consent of the customers. This aspect has been lost sight of in the impugned findings. Further vide clause 2.0 of the slump sale agreement, PPL agree to reimburse Rs. 2 crores to PAL on confirmation from the lenders that such payment has been made by PAL to them towards prepayment costs. According to the impugned findings, there was no slump sale as the liability of PAL was not transferred. This finding is equally erroneous. PAL had obtain loans from financial institutions like the ICICI. When PAL signed MOU on March 11, 1993, they had to obtain NOC from the said lenders. Whenever a borrower (including Government of India) seeks substitution of loans, the lenders levy additional interest costs. Without the permission of the lenders, the loans can never be substituted or assigned. In the circumstances, under clause 2.0 what is contemplated is that PAL will obtain NOC from the lenders and the cost up to Rs. 2 crores on account of additional interest shall be reimbursed to PAL by PPL and that too on confirmation being obtained from the lenders that PAL had paid the prepayment cost or additional intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, the Tribunal erred in holding that there was a depreciation fund which was not transferred to PPL. Depreciation is a notional deduction in the value of assets. It is not an item of transfer. In this case, depreciation was not invested in Government security. In this case, there was no separate fund created. There was only a depreciation account in the books of PAL to reduce, notionally, the value of the assets. It was similar to salary which is a charge on the profit and loss account. Hence, the impugned finding is erroneous. According to the next impugned finding, PAL had failed to transfer its liabilities to the extent of Rs. 13 crores and, therefore, there was no slump sale. This finding is also erroneous. On March 11, 1993, a new paint shop was under construction. The transferee insisted that PAL should discharge its liability to their contractors and that PAL should complete the construction and hand over the newly constructed paint shop to PPL. There were two ways of discharging this liability PAL could have transferred their liability to PPL by reducing the consideration amount from Rs. 210 crores to Rs. 197 crores or PAL could have discharged its liability of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whole for a lump sum amount. That, even after the sale date September 29, 1994, there was continuity of business by PPL of manufacturing 118 NE cars and Peugeot cars. That, the balance-sheet, profit and loss account and the assessment order of PPL show that within six months' period ending March 31,1995, PPL has sold cars to the value of Rs. 177.26 crores (approx.). That, the entire arrangement was to the effect that the French company AP agreed to make an investment of Rs. 350 crores in the joint venture because the other contracting party, viz., PAL had infrastructure to manufacture 118 NE cars at Kalyan, Kurla and rune. That, PPL did not intend to purchase assets individually/separately and that they intended to buy the entire Kalyan business for a lump sum price. Therefore, reading the arrangement in its entirety along with the relevant circumstances prevalent on March 11, 1993, we are of the view that, in this case, there was a transfer of the Kalyan business as a going concern to PPL and that the Tribunal erred in holding that there was a sale of itemized assets. That, mentioning of value/consideration in respect of land or building will not per se take the transaction out o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the net current asset did not give rise to any profits and, therefore, that value had to be ignored. These accounts of PAL support the slump sale agreement because the accounts are not based on the sale of itemized assets. This aspect has been lost sight of by the Assessing Officer. There was a separate ledger for the Kalyan business which contains various heads of accounts, viz., building account, land account, plant and machinery account, in which debit/credit entries were made as per the figures given on page 341 of the paper-book. Rs. 81.31 crores was the book surplus and not a tax surplus. In order to decide the tax surplus, one has to take into account cost of acquisition of building, plant and machinery, paint shop, etc. Therefore, Rs. 81.31 crores did not represent taxable profits. That, figure represented only book profits. These accounts of PAL support the slump sale agreement. Therefore they are relevant. Under section 2(14), capital asset is defined to mean property of any kind held by an assessee whether connected or not connected with his business or profession. In the case of West Coast Electric Supply Corporation Ltd. v. CIT [1977] 107 ITR 483 (Mad), it has been h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en at Rs. 97.73 crores. Similarly, the sale price for building is fixed at Rs. 23.24 crores. Similarly, the sale price for paint shop is taken at Rs. 68 crores. Basically, the Assessing Officer has apportioned Rs. 210 crores over land, building, plant and machinery. However, he has not given any sale value to intellectual property, the right to use the name "Premier", technical proprietary information and intangibles like licences, quotas, permits, etc., all of which have been transferred to PPL and consequently the liability of PAL stood increased arbitrarily. Moreover, there is arbitrariness in the assignment of sale value by the Assessing Officer. For instance, the Assessing Officer has assigned sale values to buildings, plant and machinery on the basis of the report of the valuer of September, 1996. However, when it came to assignment of the sale value to the paint shop, the Assessing Officer, arbitrarily, without reasons, has reduced the value of the paint shop from Rs. 70 crores to Rs. 68 crores although the paint shop is valued at Rs. 70 crores in the said report. The reason is obvious. If the paint shop is valued at Rs. 70 crores then the total of the assigned sale values e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as no definition of slump sale. The concept of slump sale is based on judge-made law. Under the circumstances, even if we were to accept the contention of the Department, namely, that there was a sale of itemized assets, the computation of capital gains tax liability in this case is erroneous as Rs. 210 crores is not apportioned over all the transferred assets. (D) Consequences of our holding that there was a slump sale In this case, we have held that sale of the Kalyan business was for a slump price. In this appeal, we were only required to consider whether the transaction was a slump sale and having come to the conclusion that there was a sale of business as a whole, we have to remand the matter back to the Assessing Officer to compute the quantum of capital gains. For that purpose, the Assessing Officer will have to decide the cost of the undertaking for the purposes of the computing capital gains that may arise on transfer. That, the Assessing Officer will also be required to decide its value under section 55 of the Income-tax Act. Further, the Assessing Officer will be required to decide on what basis indexation should be allowed in computing the capital gains and the qu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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